Extension of Transition Relief for Certain Partnerships
and Other Pass-Thru Entities Under Section 470

PURPOSE

This notice extends by one year the transition relief provided in Notice
2005-29, 2005-13 I.R.B. 796, under § 470 of the Internal Revenue
Code to partnerships and other pass-thru entities that are treated as holding
tax-exempt use property as a result of the application of § 168(h)(6).

BACKGROUND

Section 848 of the American Jobs Creation Act of 2004, Pub. L. No. 108-357,
118 Stat. 1418, 1602, enacted on October 22, 2004, added § 470,
which imposed new limitations on the deductibility of losses relating to tax-exempt
use property. Under § 470(c)(2), “tax-exempt use property”
has the meaning provided under § 168(h) (with certain modifications).
Under § 168(h)(6), if any property that is not otherwise “tax-exempt
use property” under § 168(h) is owned by a partnership that
has both a tax-exempt entity and a person who is not a tax-exempt entity as
partners, and any allocation to the tax-exempt entity of partnership items
is not a qualified allocation, an amount equal to the tax-exempt entity’s
proportionate share of the property generally is treated as tax-exempt use
property. Section 168(h)(6)(E) provides that rules similar to those applicable
to partnerships in determining whether property is tax-exempt use property
apply to other pass-thru entities. Section 470 generally applies to leases
entered into after March 12, 2004.

Notice 2005-29 provides transition relief to partnerships and other
pass-thru entities that are treated by § 470 as holding tax-exempt
use property as a result of the application of § 168(h)(6). Specifically,
Notice 2005-29 provides that in the case of partnerships and pass-thru entities
described in § 168(h)(6)(E), for taxable years that begin before
January 1, 2005, the Internal Revenue Service will not apply § 470
to disallow losses associated with property that is treated as tax-exempt
use property solely as a result of the application of § 168(h)(6).

The Treasury Department and the Service understand that Congress is
considering possible legislation that would affect the application of § 470
to certain transactions involving partnerships and other pass-thru entities.

EXTENSION OF TRANSITION RELIEF

In the case of partnerships and pass-thru entities described in § 168(h)(6)(E),
for taxable years that begin before January 1, 2006, the Service will not
apply § 470 to disallow losses associated with property that is
treated as tax-exempt use property solely as a result of the application of
§ 168(h)(6). Abusive transactions involving partnerships and other
pass-thru entities remain subject to challenge by the Service under other
provisions of the tax law.

EFFECT ON OTHER DOCUMENTS

Notice 2005-29 is modified and superseded.

DRAFTING INFORMATION

For further information regarding this notice, contact John Aramburu
of the Office of the Associate Chief Counsel (Income Tax & Accounting)
at (202) 622-4960 (not a toll-free call).